Is Bitcoin’s (BTC-USD) price action currently in a distribution phase?
To answer that question, investors first need to understand the Wyckoff method. Well-known in the world of technical analysis, this method attempts to describe a repeatable market structure through four phases: accumulation, markup, distribution, and markdown.
The idea revolves around basis supply and demand dynamics between institutional and retail investors.
In the Wyckoff framework, smart money first accumulates positions, purchasing at lower prices. As accumulation ends, the uptrend begins as demand from momentum chasers outstrips supply. Toward the end of a sizeable move higher, smart money then begins to offload positions, selling to new, retail buyers. That occurs prior to the final phase – markdown – where prices decline and supply exceeds demand. This last phase is what typically marks the start of a correction or bear market.
Detection of a distribution phase – in which the smart money is backing out as retail investors head in – is important. This is where there might be a warning sign of the markdown to come. A key feature of distribution is range-bound pricing. A distribution phase might be followed not by a consolidation phase, but instead by an abrupt shift into a markdown phase as prices fall sharply in response to institutional investors unloading supply.
Bitcoin’s recent price action may be showing a pattern known as a rounding top, which is a classic distribution pattern. It forms when an uptrend begins to gradually morph into a downtrend, resulting in a curved, dome-like shape on the price chart.
The rounding top is a sign that buying pressure is weakening and sellers are beginning to take control of the asset.
It’s noteworthy that this pattern is emerging despite inflows continuing into various Bitcoin exchange-traded funds (ETFs). It’s also happening as hedge funds seem to be net short sellers of Bitcoin. So, we have this tug of war happening with Bitcoin prices.
The Bottom Line on Bitcoin Prices Now
On one side, investors are still very bullish and calling for Bitcoin to surpass $100,000 this year. On the other side, there’s clear resistance taking place in the chart that is preventing it from sustainably blowing past $70,000.
To be clear, I’m not a Bitcoin hater. This is more just an observation on my end. The fact that Bitcoin has stalled out is a small red flag as the S&P 500 and Nasdaq continue to push to new highs. If you’re a Bitcoin maxi, you should welcome a distribution phase because it means you might be able to pick up cheaper Bitcoin. If you’re a bit late to the game, be mindful of the risk that Bitcoin, when it goes down, tends to go down much faster than other investments.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
